Since 2014, the European real estate debt fund market has been steadily paddling, waiting for its next big wave.
While there have been constant ripples of activity in this relatively young space, our figures show something of a lull in fundraising, with less brought in year after year. But in 2017 the tide has turned, with the first nine months already outstripping last year’s total in what could be the start of a fresh surge of capital accumulation.
Private real estate debt in Europe took off as an asset class around 2009 and 2010, and a select few funds are now on their second or third fundraises, tapping existing investors and selling their track record in the sector to new capital providers.
AXA Investment Managers – Real Assets and PGIM Real Estate have played their part in this year’s upsurge – closing funds on €1.5 billion and more than £1 billion (€1.1 billion) respectively.
Added to this is Kildare Partners’ second European fund, which held a final close in May on $1.95 billion, just shy of its $2 billion target. Investors such as California State Teachers’ Retirement System, Houston Municipal Employees’ Pension System and Texas Municipal Retirement System committed to the fund during the one-year fundraising. Although it is worth noting that Kildare European Partners II is an opportunistic fund, which has the ability to invest in European debt, rather than a lending fund per se.
Real Estate Capital data reveal that five funds held a final close in just over nine months of this year, with a total haul of €5.3 billion. Compared with fundraisings in other asset classes, this is a small figure, but capital raised already overshadows 2016’s €3.4 billion and bucks the downward trend. Indeed, just two funds that held a 2017 final close – the Kildare vehicle and AXA’s Commercial Real Estate Senior 10 – almost matched the total raised by the 16 funds holding a final close last year.
Caution was the word on investors’ lips during 2016 – a year marred by Brexit. Tickets were held back as investors considered their options in the wake of the UK’s EU referendum vote. Currency volatility also took its toll on investor sentiment.
So far in 2017, the five funds closed averaged 14 months on the road – from fund launch to final close.
Almost half of the amount raised between January and October was focused on senior debt opportunities, with a further third of the capital targeting distressed investments across Europe. Subordinated and mezzanine debt made up 22 percent of the total.
Focusing more closely on the third quarter, two fund managers closed their respective vehicles. AXA’s funds in September and ICG-Longbow’s Senior Debt Fund Vintage III, which held a £370 million (€418 million) final close in August.
If fundraising continues at this pace, end of year 2017 figures for real estate debt fundraising could double the 2016 total. As of 9 October 2017, there were 42 funds in market – those yet to reach a final close – seeking an aggregate €12.9 billion from investors. Only one of these funds was targeting more than €1 billion.
Algebris Investments, seeking €1.25 billion for its second non-performing loan fund, was the largest fund in market, followed by AgFe’s £800 million Real Estate Senior Debt Fund II.
Two key investment strategies dominate current fundraising, accounting for the majority of the €12.9 billion aggregate target: subordinated/mezzanine funds account for 47 percent; while senior debt strategies are also targetting 47 percent. Distressed debt made up a paltry 4 percent of the total.
Such a low proportion of capital focused on distressed investing is surprising, especially so late in the economic cycle, although funds that make up these figures account only for those focused solely on the European market. Other large, global funds managed by some of the largest equity houses will also opportunistically invest in the region, and may make up a large proportion of European distressed debt investing. As whispers of a potential ‘turning of the cycle’ get louder in the corporate debt sphere, will real estate debt follow suit?
Investors seem to think so. Frank Barbarino, senior investment officer of private and public credit at New York City’s Office of the Comptroller’s Bureau of Asset Management, stated the importance of distressed debt as part of the investment manager’s investment portfolio in a recent interview with sister publication, Private Debt Investor.
“We think that the money the systems have allocated with managers that can take advantage of a counter-cyclical move in credit by moving into stressed or distressed credits adds a lot of value to their portfolios,” Barbarino said.
A downward trend in fundraising since the 2014 zenith of private real estate debt has been halted in 2017 – and with almost €13 billion in the market, the future of the asset class seems secure. As banks remain risk averse, private debt providers continue to carve their niche.